HOW CAN I PREPARE FOR AN IRS, EDD, SALES TAX, OR FTB AUDIT?

How can I prepare for an IRS, EDD, Sales Tax or FTB audit?

If you are selected for an IRS audit or EDD audit, it is easy to feel overwhelmed and underprepared. This tax blog post will help you understand the process and prepare for a successful outcome. Therefore, organizing the records you bring or send to an auditor will speed the process and prevent errors or misunderstandings. Organize your records by year and type of income or expense, and include a summary of transactions.

Analyze the tax return that will be audited

First, begin with the basics: understand your tax returns. IRS and EDD auditors will analyze your tax return, so you should as well. Start by reading the correspondence thoroughly to know what issues the auditor will review. Talk with the auditor as soon as possible to build a rapport and to build credibility. However, be wary because any information given to the IRS or EDD auditor can and will be used against you. Review your tax returns for any issues that could arise. Analyze gross receipts and deductions. Organize your substantiation that is needed to prove that deductions that were reported are accurate.

Compile documentation to support the tax return expenses and positions

Compile your documentation. Documentation is what is typically needed in most cases to prove deductions and tax return positions. The particular documentation that is needed is determined on a case by case basis. Typical documents that are needed are banks statements, credit card statements, receipts, mileage and travel logs, documentation regarding any sales and basis, and other documentation that is pertinent to the audit. Present receipts and payment substantiation by date with notes on what they were for and how the receipt relates to your business. Moreover, in addition to providing the dollars paid or received for a service or product, certain kinds of receipts can prove mileage.

Develop a strategy to present the data to the auditor

Once you have analyzed the return positions and compiled the documentation prepare a strategy for explaining the positions on the return and presenting the documentation. Also, keep in mind how you will deal with any potential penalties that the IRS could assess. The auditor should examine a limited scope of the categories and you should try to limit the years that are opened for examination. The IRS auditors have a limit on the amount of years that can be audited. See our tax blog regarding the statute of limitations for IRS audits. If there are limited amounts of receipts, then bank statements can be used to substantiate certain types of expenses, as long as they are clear as to what the expense was used for and how it is business related.

What will the auditor do in the process of the examination?

The auditor will review banks statements for deposits to analyze whether there is underreporting of gross receipts or income. Moreover, the examiner will then sample a few categories of expenses to determine if there is sufficient substantiation to justify the expense. Additionally, the auditor will also conduct an interview with the taxpayer. However, the taxpayer’s representative can represent the taxpayer during the interview in the place of the taxpayer. This is ideal situation so that the representative can relay answers to the IRS auditor. For more information specifically to EDD audits, please refer to our EDD audits discussion. See also, CDTFA audits and FTB audits. Moreover, be aware of potential CDTFA penalties. 

Conclusion: How Can You Best Prepare for An Audit?

Taxpayers frequently ask their tax attorney how to prepare for an audit. It is best to obtain legal representation as soon as possible when your tax return has been selected for an IRS audit, California Sales Tax Audit, or EDD audit. Please contact a tax attorney at Disparte Tax Law for a free consultation today to discuss questions you have regarding your IRS, EDD, Sales Tax or FTB tax disputes.